May 24,2018
the staff of the Ridgewood blog
Ridgewood NJ, as expected ,according to the IRS , “Despite state efforts to circumvent the new statutory limitation on state and local tax deductions, taxpayers should be mindful that federal law controls the proper
characterization of payments for federal income tax purposes”.
No surprise here , the IRS may not look kindly at New Jersey’s attempts to skirt Federal Tax law , congratulations you’re screwed !
Guidance on Certain Payments Made in Exchange for State and Local Tax Credits
NOTICE 2018-54
SECTION 1. PURPOSE
This notice informs taxpayers that the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) intend to propose regulations
addressing the federal income tax treatment of certain payments made by taxpayers for
which taxpayers receive a credit against their state and local taxes.
SECTION 2. BACKGROUND
Section 11042 of “The Tax Cuts and Jobs Act,” Pub. L. No. 115-97, limits an
individual’s deduction under § 164 for the aggregate amount of state and local taxes
paid during the calendar year to $10,000 ($5,000 in the case of a married individual
filing a separate return). State and local tax payments in excess of those amounts are
not deductible. This new limitation applies to taxable years beginning after December
31, 2017, and before January 1, 2026.
In response to this new limitation, some state legislatures are considering or
have adopted legislative proposals that would allow taxpayers to make transfers to
funds controlled by state or local governments, or other transferees specified by the
state, in exchange for credits against the state or local taxes that the taxpayer is
required to pay. The aim of these proposals is to allow taxpayers to characterize such
transfers as fully deductible charitable contributions for federal income tax purposes,
while using the same transfers to satisfy state or local tax liabilities.
Despite these state efforts to circumvent the new statutory limitation on state and
local tax deductions, taxpayers should be mindful that federal law controls the proper
characterization of payments for federal income tax purposes.
SECTION 3. GUIDANCE TO BE ISSUED
The Treasury Department and the IRS intend to propose regulations addressing
the federal income tax treatment of transfers to funds controlled by state and local
governments (or other state-specified transferees) that the transferor can treat in whole
or in part as satisfying state and local tax obligations. The proposed regulations will
make clear that the requirements of the Internal Revenue Code, informed by substance
over-form principles, govern the federal income tax treatment of such transfers. The
proposed regulations will assist taxpayers in understanding the relationship between the
federal charitable contribution deduction and the new statutory limitation on the
deduction for state and local tax payments.
SECTION 4. DRAFTING INFORMATION
The principal authors of this notice are Mon Lam and Merrill Feldstein of the
Office of Associate Chief Counsel (Income Tax & Accounting). Other personnel from
the Treasury Department and the IRS participated in its development. For further
information regarding this notice, contact Ms. Lam or Ms. Feldstein at (202) 317-5100
(not a toll-free call)